Analysts estimate Earthstone tacked on a net increase of 2,677 acres to its roughly 30,000 net-acre position in the Midland Basin for less than $6,000 per acre. (Source: Hart Energy/Shutterstock.com)
Earthstone Energy Inc. (NYSE: ESTE) said Oct. 8 it completed a trade with an undisclosed offset operator set to block up its Midland Basin acreage position for longer laterals in the Permian.
The acreage swap comprised an average 100% working interest in 3,899 net operated acres in Reagan County, Texas, in exchange of 1,222 net nonoperated acres in Glasscock County, Texas, with average working interest of 39% and $27.8 million in cash.
As a result, Earthstone tacked on a net increase of 2,677 acres and about 350 barrels of oil equivalent per day (boe/d) for less than $6,000 per acre, according to Mike Kelly, senior analyst with Seaport Global Securities LLC.
“Assuming $35,000 to $40,000 per flowing boe on acquired production, we estimate Earthstone paid about $5,200 to $5,800 per acre for the incremental 2,667 net acres,” Kelly said in the firm’s research note on Oct. 8.
The trade included 14 proved developed producing wells—eight horizontal and six vertical. The transaction also gives Earthstone 75 gross potential drilling locations in the Wolfcamp A, Upper B and Lower B formations with an average lateral length of about 6,650 ft.
Earthstone said the producing wells acquired in the trade are connected into a third-party crude oil pipeline gathering system, which will assure flow capacity for this oil as well as any future volumes from producing wells on this acreage. The effective date of the trade is Sept. 1.
In addition, Earthstone is targeting to finalize and close the acquisition of a mineral lease which will add roughly 760 net acres. The terms and seller were undisclosed.
In total, Earthstone expects to hold about 30,000 net acres in the Midland Basin, of which 23,300 acres are operated by the company, following close of its recent acreage transactions.
Robert J. Anderson, president of Earthstone, said the company continues to target acreage transactions and trades where it can add to its existing operated positions, increase its inventory of wells with 10,000-ft laterals and enhance operating efficiencies.
“This strategic transaction along with our pending acreage acquisition provides for enhanced development and operating advantages and importantly results in a contiguous acreage position of approximately 14,000 net acres with an average 85% working interest in central Reagan County, where we have the bulk of our operated acreage,” Anderson said in a statement.
He continued that the acreage trade will “immediately increase our cash flow, help lower our average lease operating expense per boe and provide enhanced flow assurance as we operate in a larger concentrated block.”
On Oct. 8, Earthstone also provided an update on its one-rig drilling program in the Midland Basin, where it recently completed drilling a three-well pad in central Reagan on its TSRH block of acreage (100% working interest).
The wells on its TSRH block, which is adjacent to the acreage Earthstone acquired through the acreage swap, consisted of two Wolfcamp A wells and one Upper Wolfcamp B well with an average lateral length of 7,338 ft.
In Upton County, Earthstone completed its first well (100% working interest) on the Benedum block with a 7,453-ft lateral targeting the Wolfcamp B producing about 1,875 boe/d (87% oil).
The company said that although the well has been online for only 10 days, the oil rate continues to increase and should reach peak rates within the next 30 days.
Lastly, Earthstone said it just finished drilling a two-well pad targeting the Upper Wolfcamp B formation in its WTG area in southeast Reagan.
The WTG 5-233 1BU well (41% working interest) had a lateral length of about 12,500 ft and the WTG 5-233 A 2BU well (50% working interest) had a 9,900-ft lateral. Completion operations on the two wells are now underway with first production expected in November, according to the company release.
Kelly said viewed Earthstone’s completions as impressive and added the company’s drilling and completion schedule remains on track with its prior plans.
“We continue to see Earthstone as one of the more attractive valuation stories in the E&P space with an implied valuation of less than $13,000 per net Midland Basin acre,” he said.
Emily Patsy can be reached at epatsy@hartenergy.com.
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